Researcher ORCID Identifier

0009-0003-5963-7145

Graduation Year

2025

Date of Submission

11-2024

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

Matthew Magilke

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2024 Aaron Morales

Abstract

This paper examines whether classification shifting by public U.S. firms increased during the COVID-19 pandemic. The adverse economic conditions created by the COVID-19 pandemic presented a unique opportunity for managers to inflate core earnings by shifting expenses to income-decreasing special items, realizing potential benefits for firms in enhanced investor assessments but reducing the reliability of financial statements and increasing the risk of investor losses. Using a modified version of McVay’s (2006) model to measure classification shifting developed by Abdalla and Clubb (2023), I find no evidence that classification shifting increased during the pandemic. Though I found that the significance and magnitude of classification shifting depended on industry classification, I also found no evidence that those industries most adversely affected during the pandemic increased classification shifting. My findings imply that investors are not at an increased risk of losses or that the reliability of core earnings fell due to increased classification shifting during the pandemic. My findings also imply that industry and the level of discretion in related industry-specific income-decreasing special items play a significant role in the prevalence of classification shifting.

This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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